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On May 23, Endeavor Group Holdings Inc. (NYSE: EDR), owner of UFC and Miss Universe, filed for its IPO.
The company and stock is receiving a lot of attention. After all, it is also Hollywood's biggest talent agency. But owning Endeavor stock could be a risky venture for retail investors.
Today, we'll show you everything you need to know about this talent agency – and why the stock will be a pass for retail investors for now…
In the meantime, we have a great backdoor play for those of you interested in Endeavor stock without all of the risk of early IPOs. And we'll take a look at that in just a minute.
But before we show you this backdoor play on the Endeavor IPO, here's everything you need to know about William Morris Endeavor…
What Is Endeavor Group Holdings?
Endeavor Group Holdings is a California-based talent agency founded in 2009 after the 121-year-old William Morris Agency merged with Endeavor Talent Agency. Today it sells media rights in over 160 countries and manages 700 global events as well.
The company itself is headed by Co-CEOs Patrick Whitesell and Ari Emanuel – both of whom were former Endeavor Talent Agency executives and listed on Fortune's "Businessperson of the Year" list in 2010. Meanwhile, The Guardian and The Wall Street Journal both referred to Emanuel as a 21st-century "super-agent" for the talent industry.
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While Endeavor is most commonly known for being the owner of the Ultimate Fighting Championship (UFC) and the Miss Universe Pageant (which it purchased from Donald Trump in 2015), it represents major talent across a variety of platforms. This includes television, movies, theatre, music, sports like the NFL and NHL, e-commerce, esports, and digital publishing.
The company has partnered with investment groups and digital media and entertainment companies like Vice Media. It has also had its hands in Zumba fitness, Seth MacFarlane's movie "Ted," and the Coachella Music Festival.
The company even grabbed the attention of Silver Lake Partners in 2012, which resulted in the private equity firm acquiring a 51% minority stake in Endeavor. And this is a private equity firm that has invested in companies like Alibaba Group Holding Ltd (NYSE: BABA), AMC Entertainment Holdings Inc. (NYSE: AMC), and Dell Technologies Inc. (NYSE: DELL).
Beyond that, Endeavor itself acquired a minority stake in the ad agency, Droga5, in July 2013. Droga5 has major accounts like The Coca-Cola Co. (NYSE: KO), Motorola Solutions Inc. (NYSE: MSI), and Spotify Technology SA (NYSE: SPOT). But Endeavor also represents other well-known brands like Visa Inc. (NYSE: V), Anheuser Busch InBev NV (NYSE: BUD), and Under Armour Inc. (NYSE: UAA).
Endeavor also dabbles in philanthropy.
Its WME Foundation was created to help disadvantaged children through art and education. Its IMG Academy helped train young athletes into professionals. Clients who've used its services include Alicia Keys, Usher, Charlize Theron, and Hank Azaria. But on Endeavor's prospectus, it even revealed that one of Hollywood's highest paid actors, Dwayne Johnson, is also an investor in the company.
So, to say this company is simply a talent agency would be a great understatement. It's become an empire of sorts.
But even with all of that, there are inherent risks and a bit of controversy surrounding the Endeavor IPO. In fact, its financials aren't as strong as you'd think…
What Did Endeavor's IPO Filing Reveal About Its Financials?
But with its recent IPO filing on the New York Stock Exchange under the ticker "EDR," its SEC filing didn't provide Endeavor's stock price or IPO date yet. What it did reveal, though, is that that it is offering $100 million in Class A Common stock, Class B stock, Class X stock, and Class Y stock. However, MarketWatch says that number is likely to change over the coming months.
All of these will provide a variety of voting rights except for Class B shares (which will have none). Class A and X will offer 1 vote per share while Class Y will offer 20 votes per share.
Beyond that, Silver Lake Partners invested $700 million into Endeavor while SoftBank Group Corp. (OTCMKTS: SFTYBY) invested $250 million. This means Silver Lake has a 51% stake in Endeavor while SoftBank has 5%.
And while everything we've said so far makes this company sound like an absolute gold mine, its financials are relatively weak.
Its long-term debt is over $4.6 billion, and its liabilities are around $7 billion due to write-offs, franchise depreciations, mergers, and discontinued operations.
Endeavor's revenue for 2018 was $3.61 billion – a 20% increase from 2017's $3.02 billion. But it's been operating at a loss for close to five years with over $4.6 billion in debt.
And despite 2018 being the first year the company recorded positive net income of $231 million, this was only due to it selling off its IMG College sports marketing unit for $400 million – meaning its expenses still exceed its income.
In Q1 2019, its EBITDA dropped 10% to $84 million from the same period the year prior. So, its margins shrunk to 28.3% in 2018 and 8.3% so far 2019. This means the company's chance at long-term profitability is shrinking.
But the company's financial situation isn't the only deterrent for potential investors. In fact, the company is also experiencing controversy on two different fronts…
What Is the Endeavor Controversy?
While Endeavor has its hands in everything from UFC to esports leagues, there is controversy surrounding the company.
Back in November 2017, action-star actor Terry Crews spoke out against Endeavor's head of motion picture department, Adam Venit. He told Good Morning America about a February 2016 incident in which Venit had inappropriately touched Crews at an industry party.
Shortly after, Venit was suspended following an internal investigation. Unfortunately, within a month, Venit was brought back from his unpaid leave. Since then, Crews and his lawyers filed a suit against Adam Venit to hold him accountable for his sexual and predatory actions.
But the controversy extends beyond just sexual assault allegations, too.
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With Endeavor's shift to becoming a content producer and investor, issues over conflicts of interest have come up.
In fact, the Writer's Guild of America now wishes to break a 1976 agreement between agencies and writers to work with other agency clients on projects. And much of this is due to fear over agents looking out for their own interests and lining their pockets rather than finding the best deals for writers.
So, with rocky financials, sexual assault allegations, and 2019's massive dispute between agencies and Hollywood's writers, Endeavor stock will be risky for investors after the company's IPO.
In the meantime, we have a safer investment for retail investors to get in on early IPOs without all of the volatility that normally comes with them.
The Best Backdoor Play on Endeavor Stock
About the Author
Daniel Smoot is a Baltimore-based editor who helps everyday investors with stock recommendations and analysis. He regularly writes about initial public offerings, technology, and more. He earned a Bachelor's degree from Towson University.